Question from the Institute of Chartered Accountants in Ireland, Professional Examination 2, Management Accounting & Business Finance I,Summer 1996. (30 minutes)

Newsnow Ltd, publishers of the Daily Oracle newspaper, has the following projected daily performance according to its budget for 1996: lpoi58

The budget is based on daily sales of 40,000 copies of the Daily Oracle.
All costs and revenues, with the exception of occupancy costs and depreciation, vary in direct proportion to sales volume.
The management is concerned at the forecast loss and is considering two options which it hopes will improve the situation.
OPTION X This involves improving the quality of the Daily Oracle with the intention of increasing the cover price and attracting readers in higher income categories. Under this option, the selling price would increase to 27p per copy and advertising revenue would increase to 12p per copy.
However, as a result of the employment of more specialised journalists, the direct labour cost per copy would increase to 12p. In addition, the charge for depreciation would increase to £1,500 per day. Under this option, it is estimated that sales would decline by 10% as compared with the 1996 budget.
OPTION Y This involves making no charge for the newspaper and delivering it to 400,000 homes each day. Under this option, advertising revenue would increase to 31p per copy and distribution costs would increase to 10p per copy.

Except for the changes referred to under Option X and Option Y above, the variable cost per copy and the daily amount of fixed costs are as per the 1996 budget.
REQUIRED

Transcribed Image Text:

Sales 8,800 Advertising revenue 4,000 Direct materials (3,600) Direct labour (3,200) Variable overheads Distribution costs (1,200) (2,400) Occupancy costs (2,000) Depreciation on plant (1,000) Net profit/(loss) per day (600)